Over the past few months chain drug retailing has been turned upside down, as the industry’s three most important retailers — Walgreen Co., CVS Caremark Corp. and Rite Aid Corp. — announced game-changing alterations.

Big three drug chains are being reshaped

July 19th, 2010

by David Pinto

Over the past few months chain drug retailing has been turned upside down, as the industry’s three most important retailers — Walgreen Co., CVS Caremark Corp. and Rite Aid Corp. — announced game-changing alterations.

In that short span of time Walgreens acquired Duane Reade; Rite Aid reported that Mary Sammons, the retailer’s iconic chief executive, would relinquish that position while staying on as chairman for the next two years; and Tom Ryan, CVS Caremark’s legendary CEO, stunned the industry by stating that, after 13 years as CEO, he would step aside next year in favor of Larry Merlo, current president of the company’s drug store unit.

Each in its way is a dramatic development. Together, they constitute the most significant reshuffling chain drug retailing has seen in this century. Combined, they will influence and reshape each of America’s three most influential drug chains in ways not seen since Rite Aid acquired Brooks Eckerd in 2007, CVS merged with Caremark in 2007 or, going further back, Walgreens laid out its inviolate approach to drug store retailing in the mid-1970s, one that redefined it as a chain drug retailer and put in place a blueprint for growth that centered on new-store openings.

Walgreens’ acquisition of Duane Reade will certainly alter the Deerfield, Ill.-based drug chain’s approach to its business and the look of its stores. Even at the outset, it is apparent that Duane Reade makes available to Walgreens several very talented and unorthodox (from Walgreens’ standpoint) executives, along with an urban model that is arguably more appropriate, more appealing and more effective than Walgreens’ current urban approach to retailing, a beauty format and private label program that are more imaginative than Walgreens’ initiatives in these areas, and an up-and-running loyalty program that compares favorably with the program Walgreens is currently, and belatedly, testing in three markets.

Certainly, several of these executives and a handful of these programs will find their way, in some form, to Deerfield, irrevocably changing this company — almost certainly for the better.

Mary Sammons’ decision to step aside as Rite Aid’s CEO will affect that drug chain in many ways. As completely as any retailing CEO of the past decade, Sammons is identified with Rite Aid. It is her company, more nearly than it could be labeled a product of the founding Grass family a generation or two earlier. It both reflects and embodies her thinking, her ideas, her concept of retailing, her view of what a drug store should be and do.

If that view, and those ideas and concepts, have not always found their way into the Rite Aid drug store, or altered the drug chain to the degree she would have wished, circumstances that Sammons inherited and has not always been able to surmount are as much at fault as any internal management deficiencies.

Rite Aid’s debt, and perhaps its overly ambitious acquisition of Brooks Eckerd, are the real villains here, not Sammons’ vision, strategy or inability to relate to, or connect with, her associates. Those associates, it was once again made clear at a recent event in Harrisburg, Pa., to recognize Sammons’ accomplishments, are clearly devoted to her — and in awe of her achievements.

Clearly, then, she will be missed as CEO, though she will remain as chairman — whatever her presence in that capacity will ultimately mean to the company, its new leader and its associates.

Speaking of the company’s new CEO, John Standley, whatever his resume or his past retail contributions, he remains largely an unknown factor as he assumes the leadership of the nation’s No. 3 drug chain. How he performs in his first year as CEO and, more to the point, how he relates to, works with and utilizes the considerable abilities Sammons can still bring to the company, will largely determine Rite Aid’s future. Should Standley choose to ignore Sammons, bypass her presence or veto her ideas or input, he will do so at his own peril.

As for Tom Ryan, he too intends to remain as chairman when, a year from now, he turns the company over to Merlo. Initially, it was not made clear his intention to do so, which would have been a major mistake. Retailing executives like Ryan do not come along very often.

Nor is there any doubt that Ryan and Merlo will work easily and effectively together. Merlo has had no bigger supporter at CVS than the outgoing CEO. Nor is there any gainsaying Merlo’s ability. He has proven himself to be a very effective and impressive leader, one who has easily won his staffers’ support and loyalty.

Rather, the issue here is how easily and effectively Ryan will assume a background position, one that — while providing valuable guidance, ideas and input — will allow Merlo to run the company. For as anyone who knows, likes and admires Tom Ryan can attest, one does not easily disagree with him, overrule him or deny any request of his, however gently that request is positioned.

Yet if Ryan chooses to function as an active executive chairman, this will be Merlo’s key challenge. It could be a daunting assignment.